Consider the following three individuals\' portfolios consisting of investments
ID: 2742633 • Letter: C
Question
Consider the following three individuals' portfolios consisting of investments in four stocks:
Stock
Beta
Peter's Investment
Paul's Investment
Mary's Investment
Eenie
1.3
2,500
5,000
10,000
Meenie
1.0
2,500
5,000
10,000
Minie
0.8
2,500
5,000
-5,000
Moe
-0.5
2,500
-5,000
-5,000
Required: Assuming that the risk-free rate is 4% and the expected return on the market is 12%, then calculate the required return on Mary's portfolio.
Stock
Beta
Peter's Investment
Paul's Investment
Mary's Investment
Eenie
1.3
2,500
5,000
10,000
Meenie
1.0
2,500
5,000
10,000
Minie
0.8
2,500
5,000
-5,000
Moe
-0.5
2,500
-5,000
-5,000
Explanation / Answer
Eenie Return = 4% + 1.3 * ( 12% -4%) = 14.4%
Meenie Return = 4% + 1.0 * ( 12% -4%) = 12%
Minie Return = 4% + 0.8 * ( 12% -4%) = 10.4%
Moe Return = 4% - 0.5 * ( 12% -4%) = 0%
Total return = 10000 * 14.4% + 10000 * 12% - 5000 * 10.4% - 5000 *0% = 2120
Investment portfolio = 10000
Required return = 2120 / 10000 = 21.2%